Paralysis by Analysis

Congressional Budget Office Director Douglas Elmendorf stalled health care reform recently by questioning the fiscal impact of Congressional proposals already far down the legislative road. The CBO’s perceived authority and expertise reinforces the impact of such pronouncements. But if history is a guide, this emperor has no clothes.[IMGCAP(1)]Put most simply, the CBO’s track record in predicting the effects of health legislation is abysmal. Over the last two decades, the CBO has routinely overestimated the costs of expanded government health care benefits and underestimated the savings from program changes designed to reduce expenditures. Most recently, it overestimated the five-year cost of Medicare Part D — the prescription drug benefit -— by more than 35%. Even more dramatically, the CBO’s estimates of the Medicare savings from the Balanced Budget Act of 1997 underestimated the impact, on average, by a full 100%. That’s right: In the BBA’s first three years, Medicare spending fell fully twice as fast as the CBO had projected.These mistakes arise neither from a hidden partisan agenda nor a shortage of competence or commitment. The CBO’s reputation for scrupulousness, thoroughness, and nonpartisanship is well-deserved. But the very processes in which it is asked to engage, and the ways in which its results are used, make serious misjudgments almost inevitable.To start, health care is very complicated, and even with all the economists, investors and policy wonks who study it, its financial dynamics are never fully defined. Government policies certainly influence health care costs, but, as the CBO acknowledges, so do technological and labor-market changes, fallout effects from the larger economy, and mass psychology among health care providers and insurers, all of which defy predictive models. Further, the economists who dominate the CBO assume that health care providers will respond to changing economic incentives as though they were rational, profit-maximizing firms, but hospitals, managed care plans and large group practices are complex organizations with multiple, competing objectives. In the short run, they often do exactly the opposite of what microeconomic theory might predict. Perhaps most importantly, the CBO is now routinely expected to project the impacts of policy changes over 10 years, an absurdly long time to predict what will happen in so large and complex a sector as health care. Fortunately, another flaw in 10-year projections offers the way out of CBO-induced paralysis. The CBO’s most basic forecasting assumption is ceteris paribus: nothing else, other than the policy it is evaluating, will change during the forecast period. Technically, it’s hard to imagine forecasting any other way, but everything always does change, most notably policy itself. Ten years gives us a lot of time to fix mistakes.Thus, when the BBA affected health care providers more severely than had been forecast, Congress restored most of the money in 2000 and 2002. The (deservedly) much-maligned “doughnut hole— in the Medicare drug benefit (created in the first place as a way to game the CBO estimation process) may well be fixed as part of health reform — if CBO doesn’t torpedo that process. Congress convenes every year and adopts a federal budget (almost) every year. So, instead of treating CBO estimates like the Ten Commandments, we should treat them like the informed wild guesses they actually are. And the credibility of its director on the importance of an issue such as taxation of employee benefits — about which most economists, but few real people, agree — should be taken as no more than one person’s opinion, not as consensus or the product of any rigorous process.According to the Institute of Medicine, the absence of health insurance kills 18,000-20,000 Americans a year (the significant noneconomic costs of which are not part of the CBO’s calculus). Thus the moral — and rational — thing to do is not panic at the CBO’s pronouncements, but instead recognize that any important new government program will inevitably require mid-course fixes and corrections. For example, the House bill contains standby tax provisions that go into effect in 2015 or 2016 in the unlikely event that the CBO turns out to be right. There’s a better than even chance it’ll be wrong, and that those new taxes will never be necessary. In the meantime, lives will have been saved and the average American family will be much better off.Bruce Vladeck was an administrator of the Health Care Financing Administration when the Balanced Budget Act passed and is now senior adviser to Nexera Consulting, a wholly owned subsidiary of the Greater New York Hospital Association.